The Prognosis
Sears Holdings Corp (NASDAQ:SHLD) seems to be looked down upon by analysts, and is not expected to do any better anytime soon. After a loss of $2.13 per share for fiscal year 2013, which ended in January, Sears is projected to post another loss of $2.44 this year. Surely that must be it, right? Wrong! Sell-side analysts, who are usually too optimistic, project losses of $1.48 and $2.12 in 2015 and 2016, respectively. This leads me to the obvious question: why the heck are people still buying this one?
Turnaround Strategy
Sears has been trying to turn itself around for some time now, and it is debatable whether or not their efforts are producing results. One way that Sears Holdings Corp (NASDAQ:SHLD) has tried to build loyalty among its customers is with its Shop Your Way Rewards program, which is paying off somewhat, but has not been quite as successful as the company hoped for.
One area where Sears has really struggled is online, as it tries to compete with such companies as Amazon.com, Inc. (NASDAQ:AMZN). Recently, Sears has been putting added emphasis on their third-party features on their sears.com website, with several options for outside retailers to sell their products on the company’s website.
This is a valiant effort, although I don’t see Sears taking away Amazon.com, Inc. (NASDAQ:AMZN)’s business anytime soon. Amazon.com, Inc. (NASDAQ:AMZN) is the undisputed leader in online retail, and customers who buy third-party products from sears.com are mostly customers who would be using their website anyway.
The challenge remains for CEO Edward Lampert to convert the company’s renewed focus on its most productive brands and store locations into any kind of a turnaround. Something needs to happen soon, as revenues have been declining at a frightening pace, and continue to do so.
Comparison to Peers
While doing research on Sears Holdings Corp (NASDAQ:SHLD), one of the more interesting statistics I found was that Sears’ sales per share are over $360 annually. I was amazed that with sales like this, the company has not figured out how to turn a profit. However, before we jump to conclusions, let’s take a look at Macy’s, Inc. (NYSE:M), a much stronger department store chain, and J.C. Penney Company, Inc. (NYSE:JCP), which is in the midst of a turnaround effort of its own.
Macy’s, Inc. (NYSE:M) revenue is about one-third less than Sears’s; however the company’s market cap is triple Sears’s. This is the difference between a profitable business and a failing one, quite frankly. The companies have similar share prices, but Macy’s revenue per share is only about $71, a huge difference from Sears Holdings Corp (NASDAQ:SHLD). Yet, Macy’s, Inc. (NYSE:M) operates at a very nice profit margin, and earned $3.24 per share last year, for a P/E ratio of 14.6.
As mentioned, J.C. Penney Company, Inc. (NYSE:JCP) is another company on the rebound, but for some reason their efforts seem to be better received by the market. Yes, the company is projected to have a loss for this year and the next two, but the loss is expected to narrow significantly, and ultimately produce a return to profitability by 2016. I can live with that, because as I’ve said: if a company is losing money now (but won’t be forever) it could be a terrific bargain. J.C. Penney Company, Inc. (NYSE:JCP) might be one of those cases…it is certainly more likely than with Sears.
As far as the numbers go, J.C. Penney produced just under $13 billion in revenue last year, which translates to just $59 in revenue per share, although shares trade for less. A better comparative number may be revenue/market cap, in which case the companies rank:
- Sears: $6.59 in sales per $1 in market capitalization.
- J.C. Penney: $3.34
- Macy’s $1.42
The Bottom Line
For the retailers above, these sales calculations seem inversely proportional to the health of their respective companies. Comparing these figures for companies who sell somewhat similar product varieties can give you a good idea of how the market views the future of each one.
Of course, public opinion of these companies changes rapidly. The figures above are also directly proportional to the potential, should these companies successfully turn things around. With a healthy profit margin, Sears Holdings Corp (NASDAQ:SHLD) could be a $300 stock, easily. They were around $200 per share actually until things started to sour in 2007. However, do NOT throw any money into Sears that you can’t afford to lose. A company that is this far gone is akin to buying a lottery ticket.
That being said, I think that in order to keep things fun, investors should set aside a small amount of their portfolio for speculative stocks. This is definitely one of those!
The article This Speculative Retailer May Pay Off in the End originally appeared on Fool.com and is written by Matthew Frankel.
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